The Cost of Everything and the Value of Nothing: Falling Costs Are a Game-Changer

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For the average U.S. consumer, electricity is an unremarkable fact of
their existence—when they flip the switch, the light comes on. But
behind that simple act is a feat of forecasting, engineering, logistics
and timing that is mind-bogglingly complex. At the heart of this
process is the mix of generation sources—the different electric power
plants that are put online or taken offline on a day-by-day,
hour-by-hour basis, so that when someone flips a light switch, enough
electricity is available to meet that demand.

Planning, building and maintaining the right generation mix to feed
the electricity needs of customers is what utilities do, and they do it
remarkably well, all in all. Most consumers in the United States
experience very few power outages over the course of a year. And it
isn’t just about having the right mix of generation in the moment, but
looking 20 years or more into the future, and ensuring that as
generation units reach the end of their useful lifespan, they are
replaced with new capacity that can meet the challenges of the
marketplace in the future.

It is in everyone’s interest to use generation sources that operate
cheaply. But as is often the case, how much something costs is dependent
on what you’re including in the equation. Sometimes, however, the cost
savings become so clear that no matter how you measure it, one source
will be undeniably cheaper. Most experts will tell you that is why coal
has experienced such decline—natural gas and gas-fired generation is
just as effective at meeting demand and, by every means of measure, is
much cheaper.

For a long time, the same thing was true when you compared coal
to solar and wind energy—any way you looked at it, coal was cheaper. The
earliest versions of solar technology from the 1950s only converted
about 4.5% of the available energy into electricity, meaning that a
solar array had to be very big to generate a useful amount of
wattage. Subsidies and renewable portfolio standards were used, starting
in the 1990s, to incentivize people to build renewable energy
systems, but it was the technological advancement partly spurred by
those efforts that has dropped the costs and changed the game. By 2012,
efficiency rates of solar energy had tripled, and by 2015, the
technology in solar cells and panels had advanced to the point where
they converted 23.5% of the available energy, bringing the cost per watt
generated to around $.70. And the price continues to drop.

We are approaching the place where renewables like solar and wind are
often going to be the cheapest generation source compared
to their fossil fuel counterparts.

In fact, when one looks at the levelized cost of energy (i.e., the
cost per kilowatt-hour (kwh) over the life of a generation
asset), renewables already are often cost-competitive with natural gas,
and over time, a better investment. Levelization factors in not only the
cost of operation of the plant, but also the cost of installation and
financing. It’s true that the cost of energy from a plant that’s already
been built is naturally going to be cheaper than the power coming from
new generation, but fossil-fired units are being retired at
a fairly steady clip (over 40 coal generating units were being retired
in 2017 alone). Utility-scale renewable installations compare favorably
to their fossil fuel-fired counterparts when one considers they
are cheaper to build, can be easier to finance, and have a useful
lifespan that is often longer than natural gas units.

Also significant to the cost equation is the price of fuel,
another game changer. Many who compare fossil fuel-fired generation to
renewable generation leave out running costs,
including fuel costs, focusing instead on the capital cost
of building the generation asset. Most power purchase agreements for
natural gas set a daily rate that covers the cost of the physical
plant over the life of the contract, and then include an extra, variable
surcharge for fuel costs. These costs are usually determined after
power is delivered, based on the market price of the fuel, and
passed through to the ratepayers. For the last several years, the price
of natural gas has been so low that these costs have caused little
concern. They increase the overall cost per kwh to customers by
fractions of pennies.

But as anyone who has ever watched the movie “Office Space” will tell
you, fractions of pennies sooner or later add up to real dollars, and
lots of them. Natural gas is a commodity whose price is dictated by the
vagaries of supply and demand. While supply is currently plentiful, and
extreme spikes in demand are rare, market-driven pricing makes no
promises over the long term. With solar and wind, there is no cost for
fuel, and therefore no cost to pass on. Renewable generation offers the
opportunity to serve customers at a stable price that is less subject to
market volatility. Data from the Lawrence Berkeley National Lab shows
that by 2023, most of the contracts signed for wind generation in the
past five years will be delivering power at a lower cost per megawatt
hour than natural gas.

Maybe that’s why the fourth annual State of the Electric Utility
survey, conducted by the industry publication “Utility Dive,” shows 80
percent of North American utility employees expect the use of
utility-scale solar energy to increase moderately or significantly. Even
more interesting is what these industry insiders said when asked what
was the most compelling reason to invest in clean energy technologies.
Fully one-third of respondents cited economic reasons—declining prices
(15%), earnings growth and business model evolution (11%) and hedging
prices against fossil fuels (7%).

But the largest number of Utility Dive survey respondents (20%) cited
consumers’ preference for clean energy. Ultimately, this is the game
changer that cuts through that debate over costs, and makes the
winning difference, all other things being equal. Large corporations
like Amazon and Google and Apple and Walmart have already committed to
clean energy and want to buy power that can be had at fixed prices with
zero emissions. In a marketplace where large companies can choose who
provides their electricity, renewables now often have an advantage. In
the complicated calculation of which generation to build to meet the
demand for electric power, a generation source that can deliver power
with no fuel costs and less price volatility, and which customers
prefer, is a valuable asset indeed.